I'm curious to hear about people who excersised their stock options at a startup and there was a liquidity event (i.e. acquisition, merger, IPO). How good was the RoI? Did you lose money?
If the company went through bankruptcy after he purchased the shares and was subsequently re-capitalized and then became successful, his shares would have been canceled in the recapitalization. Likely by dilution to minutia.
Regardless of the method, the company would be required to inform all shareholders of such events. I'd be curious to know how the corporate books were managed at the time he purchased the shares.
Joined a company 2.5 years pre-IPO, and made about ~200k pre-tax (but I waited until after the IPO to exercise as I didn't want the risk) at lock-up, with another ~400k still vesting.
Worked at another company that supposedly on the IPO track. Didn't buy my shares, and they ended up being acquired in a fire sale and gave 1 penny per share to those that did exercise. Company had gone through three rounds of layoffs ("normal trimming down before you IPO" lol), and I still had friends that exercised their shares.
For me, I'm willing to take the tax hit by waiting to exercise since I've seen so many companies fail.
1. Exercised my ISOs at small company A when I quit, because the options were buy-within-90-days-or-lose, and they were cheap, and I felt the company had decent odds of being acquired. They were acquired a couple of years later, and my $300 of stock turned into $15k. So an amazing ROI, but a small enough amount of stock that it didn't really matter.
2. Exercised some NQ options that company B, a customer of company A that I worked with, gave me. They got acquired by company C and the stock zoomed, I sold all, then the acquiring company went bust. Most employees of company B never made any money because their shares were locked up during the period that company C was worth something. I was lucky I was a contractor and not locked up, so I cashed mine in. Made about $60k, or about 4 times what I made from Company A who I actually worked for. The moral of this story is that if you have a lot of restricted stock in a company that's worth a lot of money now but might not be worth anything later, don't assume it will be worth anything.
3. I was an employee at company D when the got acquired by a big company E and all our stock got cashed out. This was a riskless exercise-and-sell transaction, and I made about $20k for my small amount of stock. Not bad, but not life-changing.
4. I was an employee at a pretty big famous public company F that gave us RSUs, and the RSUs roughly doubled in value when I was there. I sold most, kept some, and then the company got bought by bigger more famous company G, causing my remaining shares to turn into cash at another premium. Good deal but I didn't have enough stock for it to be life-changing. I think I made about $40k all told.
5. I was an employee at another big famous public company H, that gave me a significant number of RSUs, and during the term of my employment the stock went up and to the right a lot. This one was life-changing money: I can now afford to retire.
6. I'm now an employee at another big famous public company I, that gives me a decent number of RSUs. Like most of the market, the stock went down a lot back in February and March due to COVID-19 and is since up a lot.
The takeaway? Big company RSUs > startup options, in my limited experience. Of course it really comes down to how the individual companies do, but there are so many more ways employees can get screwed with private companies.
In the .COM bubble, many, many employees got crushed by exercising and holding options that were in the money when they exercised. 'Accountants and politicians were inundated with horror stories' [0]. The crushing happened when the stock price subsequently crashed below what their option price was. That circumstance meant they were liable to pay tax on the capital gain from exercising, but, did not have enough equity in the shares to cover the tax liability.
Generally, only exercise if the shares are in the money and 1) you are immediately going to sell or 2) the options are expiring. If you're going to exercise and hold, sell enough to cover your tax liability. See an accountant if the amounts are 'large' relative to your financial situation. If they are expiring and in the money and the company is private, talk to your HR department about selling enough shares back to the company to cover the tax liability. Seek professional advice if the amount is material for you.
_Startup 1_
Joined in 2000 as employee #35 and left in 2004. Exercised options for ~$300. Company acquired in 2014 and options worth $0. Reported a long term capital loss that year.
_Startup 2_
Joined in 2005 as employee #3 and left in 2011. Never exercised options. Company still going today w/no plans to grow or sell.
_Startup 3_
Joined in 2011 as a Principal Eng and promoted to VP Eng in 2014 and had option for a little over 1% of the company. Company was acquired in 2016. Value of my options was $0.
I've repeated this many many many times. You don't work at a startup to maximize your net worth. You'd be better off working almost anywhere else and come out on average with a higher net worth.
you work at a startup because the salary is sufficient for your needs/goals and its work you want to be doing and dont think you would be able to do elsewhere (at least with the same ease). If either of those 2 choices aren't being met, you probably shouldn't be working at a startup. If both are met, you might not be caring that you aren't maximizing your net worth and hence why are willing to work there.
>I've repeated this many many many times. You don't work at a startup to maximize your net worth. You'd be better off working almost anywhere else and come out on average with a higher net worth.
100% agree. The experience gained was the invaluable part of working at a startup. That said, every startup I've talked to pitches the equity as the big thing, and not the experience. I.e.
"...and these options would be worth X at our current valuation."
I don't mind working for less on something I'm passionate about. But, if we do get lucky and the startup goes to the moon, I expect to do well!
And that's why I can't work at startups anymore. It's fundamentally unfair that VC's capture all the upside. I'm can no longer bring myself to donate half my compensation as funding and only get the measliest of common stock options in return.
if the salary you are getting sufficient, then they are taking a lot more risk than you are. most startups fail, as long as you are getting paid an amount that is sufficient for goals and are working on what you want to work on, you are taking on minimal risk. And most startups that do well, the employees do also do well (not necessarily as well, but they also took on less risk).
A startup that sells for 250 million after raising 300 million, did not do well.
A startup that basically went bankrupt and had to be recapitalized after you left, did not do well.
I've got 3 in the bag that match your #2 experience. I would love to know how common this outcome is.
My overwhelming experience is that companies rarely "fail". A good idea just chugs along with an owner making well into the 6 figures. Somebody else (like me) built the infrastructure that allows the owner to outsource the maintenance development work.
This became my reason for doing CTO as a service type solutions. A lot of people were doing this 5 years ago or so, which makes me think your #2 is fairly common.
Had a 5% equity stake in a startup that got acquired for ~$20M + earn-out. Actual payout was low due to investor 2x prefs and all kinds of shenanigans, but after earn-out/taxes it was enough to put a down payment on a nice house. Only took around 2.5 years to pay off.
Couldn't 83b at the beginning because I didn't have enough liquid cash, so I ended up paying a lot of taxes in the end. Company could have easily failed / not gotten acquired so I don't blame people who don't exercise early.
Currently have a larger stake in a startup that's dying due to COVID killing their industry, so I'll likely leave with nothing. Womp.
The problem is that you never know when a liquidity event will happen, and not all outcomes involve you at least breaking even.
The company I have my exercised options with hasn’t gotten acquired, hasn’t gone public, it just hobbles along failing to make a profit year after year receiving round after round of funding by investors who just hope to turn the company viable.
I was only able to buy a few hundred bucks of shares, and I considered the proposition to be like a night out at the casino. Plus, I get to satisfy a little post-employment curiosity by getting to read investor information like balance sheets and income statements.
In my opinion, equity compensation and/or stock options suck. They probably only make sense for people working for Microsoft, Apple, Google, Amazon, and the like. I don’t want thousands of dollars in my investments riding on the success of one single company, especially is that company doesn’t have a street named after itself.
> I don’t want thousands of dollars in my investments riding on the success of one single company
Myself as well. For the private companies where I had options, most never worked out as being worth anything so not acting on them was the actual money-saving move. For the public companies, act on them if they're worth something when they vest and take the profit over to a mutual fund; I have had some options vest at 2x the current stock price making them useless, so you just play it vesting date by vesting date and hope for some profit on each chunk.
> They probably only make sense for people working for Microsoft, Apple, Google, Amazon, and the like.
Having worked at Google, I'm pretty sure that most of us only took stock because that was simply "how it was done"; it saves the company money versus paying you in cash (I guess! not an expert here). There is an infinite amount of paperwork that results from being paid in stock, and while it's obviously worth it for $200,000 a year on top of your base salary and bonus... it is still kind of a hassle. You have to file with the IRS your plan for selling shares (so they know you're not making insider trades), you can only access your money inside trading windows (unless you set up the aforementioned auto-sale or other trading plan), and your taxes become a $700 ordeal with tax professionals every year. Honestly, I just did my taxes myself and I messed them up one year. It takes the IRS 3 or so years to notice, and then one day you have a sternly-worded letter from the government demanding $60,000 immediately because your brokerage sent the IRS incorrect paperwork. Then you pay someone to fix that, then your state says "whoa, the IRS just got $60,000 from you! we want our cut!" and then you say "no no, those papers I mailed you a year ago show that they were wrong", then you wait a year... and get a $30 check in the mail because it turns out they owe YOU money. It's a big pain. My TL;DR is you don't know how much you owe, the government doesn't know how much you owe, and you will have to pay someone to take a guess that the IRS agrees with, and hope they agree. If they don't, be ready to pay even more money to persuade them that they are wrong.
I miss the days where I got a W-2 and filed a 1040EZ. It's ultimately worth it to take the stock, of course, but it's kind of a hassle. My advice is to find an accountant your first year at a FAANG and let them handle everything. Don't do it yourself.
>My advice is to find an accountant your first year at a FAANG and let them handle everything. Don't do it yourself.
If you do go with an accountant, treat it as a learning experience so you can do it yourself or at least go over their work before submitting it. You'll be surprised at how often accountants make mistakes or leave money on the table.
I did an early exercise (83b election) when I started at a startup a few years ago, paid about $30k to exercise all my options, granting me about 0.3% ownership. Five years later, AWS made our product obsolete, and company was acqui-hired, all regular share holders were wiped out, so I lost my $30k (and worked for five years at well below market). Oops.
Didn't exercise my options before acquisition, didn't need to. Was paid the same. (Not a life changing amount of money; roughly what I would have gotten by staying at FAANG for the same amount of time. I still consider it a good outcome.)
The only difference from not exercising was I skipped a bunch of paperwork both at exercise and at acquisition time. On the other hand, the paperwork might have been interesting to learn more about how startup acquisitions work, and might have contained numbers that I would have liked to see. So in hindsight, I wish I had exercised at least a few of my options just for the sake of participating in the acquisition process as a shareholder.
I don't know if my experience is representative, though. I can certainly imagine that some exits might treat option holders differently than shareholders. I don't know the legality of that.
Worked for a startup in 2000 which Sun Microsystems bought. My options get switched to Sun options, and had a strike price higher than the value of the shares. Right before the options were set to expire, I got a call from someone at Solomon Smith Barney (remember that) who was like "I know the answer is no, but do you want to exercise these?" lol
That job, and especially my time at Sun, super kickstarted my career (I really valued my time at Sun), so I wasn't bitter at all.
A stock option is a contract that entitles the holder of the option to either buy or sell stock at a price specified at the time of the contracts creation (this is the “strike price”). The price can be anything. The value of the option is, very roughly speaking, the difference between the current price (“spot price”) and the strike price. The action of using your contract to actually do the buying or selling of shares is called “exercising” the option, and it “uses up” the contract. Each contract is for 100 shares (a “round lot”). When exercising your option and then buying or selling the shares immediately at the strike price would make you money, the option is said to be “in the money”. If not, the option is “out of the money”.
The parent comment is noting that their options are out of the money, so they’re worthless. No point in exercising.
Options are highly complicated financial instrument though, so this is a very rough explanation. This is not financial advice.
Options aren’t stocks. They are an option to buy the stocks. Exercising your options means buying the stocks. They options contract has a price for stocks set up front. Ideally the price of the stock has risen over time so when you exercise the option to buy the stocks, you are buying the stocks at a lower price than their current market value. Thus you make money.
A stock option is an agreement for the right to buy a stock at a particular price. When you exercise the option, you take them up on that agreement and actually exchange the dollars for the stock.
I exercised 8.5k shares for $25k right before Company raised at a “unicorn” valuation to avoid paying AMT because I had no idea where the FMV would end up.
Strike price was ~couple dollars, preferred shares from the round were high teens, and the FMV ended up being a little more than double my strike price.
I’m happy I’m an owner, but probably could of waited until the next round if I knew the FMV was going to be lower. IPO hopefully coming in 18-24 months.
I've had options at 3 companies that all went through some event.
1 - Company acquired after I left. I paid 3k for my shares when I left, made 3k net. Not bad.
2 - Company was self-funded when I left, paid about 2k for shares. When they took external investment years later, I needed to sell my shares, net 6k.
3 - Company I was still working for was acquired. I'm acquihired at a better salary & benefits, plus retention bonus after a year. Exercised my options at 4k to net 55k.
I've had a run of good luck, and, in each case, the cost to exercise my options was one I could afford to lose if things turned. If it comes up again, I'll have to evaluate where I am at that time. Each event is unique, you have to judge your specific circumstances.
Worked at company for 4 years. About a month after I left, the company was acquired. Fortunately, I could still exercise my options. I paid around 10K to exercise my options and got about 70k once the sale was finalized. Honestly, I was expecting more but I'm not complaining.
I left about $20k in options on the table when I left a company that was acquired about 4 months after I left. My coworker who stayed ended up doing great, but not because of options. The company put him on a $100k-per-year retainer for 4 years to stay on and help port the project.
Retainers are often much better for the little people.
I exercised 3700 options at 28c shortly before the company let around 25% of staff go. Found out just a few days ago that the company is being acquired with shares at $1.20. Pretty good for what I thought was going to be worthless.
I got compensated for my unvested options at an acquisition, with a mix of cash and stock of the acquiring company. I was paid a fair salary (initially, at least) and did not have to buy any shares, so I kind of earned extra 30 k€ (before taxes) without any investment besides working full time. I ended up owning the smallish amount of the acquirer's shares for 3,5 years and their value raised 50% during that time, profiting 1500 € more.
The acquiring company, a listed one, had an options programme I left before vesting due to bad working conditions and some lack of vision. Shortly after I sold my first batch of stocks, the stock price crashed, and my options would be worthless now if I had decided to stick with the company. Some of my colleagues are still suffering there and the total price of their vested options has stayed below 500 € all the time.
Joined a company in 2000, got 14_000 shares at $4.75/share. Company went public that same year, and stock climbed to over $50/share. I was a black box QA Engineer w/ barely any work experience and I was sitting on ~$750_000 USD of paper money. By the time I started vesting & could sell, the stock price was down to about $12/share, and I started selling everything I had vested. I ended up w/ maybe $25K in cash. A few months later the stock was at $2/share & it never back above my stock price.
A few years later I joined a company that gave me about 15_000 options at $7/share. Less than a later, the stock was over $55/share. I made pretty good money on that one.
Worked at a company almost 2 years, exercised my stock options (only $2k, it was my 2nd junior position and I didn't negotiate for equity at all). 4 years later I have no idea how much they're worth, if they even still exist, or if there's been any liquidity event.
If I had to guess based on the company's revenue, they're probably worth about 4x what they were when I exercised, but I'm planning on holding off on trying to do anything with them unless I see the company in the news for a big liquidity event in the future.
Not at a start up but I worked at a company that had yearly options or RSU grants (your choice) and a share purchase plan. Got acquired after 2.5 years and hand't exercised/sold anything up to that point. Acquiring company accelerated grants and employer match so I ended up with about 60k CAD post tax. Would have only been about 20k if they didn't accelerate.
Piggy backing here, I exercised options 2 years ago when quitting my job. The company had a down round and I don't believe they have much of a future so I'd like to sell my stock back to the company, the stock at least being worth more now than the $30k I paid on exercise. Has anyone sold stock back to their company? What was the process like?
I tried to once when quitting by asking the CEO. He said the company was not interested. If the company you left don't have a future, chances are they're don't want their stock back. Start by asking if they're interested, then give them a high but fair price.
Bought shares for about $2k (1 penny strike price) 2 years before IPO, now worth $20M. Later joined another startup, bought shares just after 1 year cliff, got acquired 6 months later. Made about $80k.
Taxes can be tricky. For each stock, you have:
* strike price: your cost
* fair market value: the "value" of your stock when you buy, usually set by a 3rd party
When you buy your stocks, you pay taxes on your virtual gain (fair market value - strike price). So you may have a huge tax bill to pay years before you can make any real profit.
On the other side, in the US, if your stocks qualify as small business stocks (you bought your stock when company had < $50M in assets and hold them for 5 years), you pay no federal taxes on first $10M.
If you buy your share early, less taxes to pay, possible QSBS, but might be a loss. If you wait longer, your options might expire (typically after 10 years), higher tax bill (as FMV increases) but less uncertainty about the value of your stocks.
I doubt many people lost money. If you're going to lose money, you don't exercise the options.
I had some in-the-money options. I operated on what you might call the principle of least regret. I wanted to get at least something from them, in case it went down. But I wanted to get more if it went up. So I sold part of my options when they were in the money. Then, after it went up some more, I sold some more. Then, after it went up some more, I sold some more. I finally sold it all in about five or six waves.
Could I have had more money if I had waited to sell? Sure... or I could have gotten nothing, if the stock had done something other than what it did.
Due to exercise windows, people are often forced to either give up all of their options, or exercise them when it is unclear that they will be worthless.
> So I sold part of my options when they were in the money.
If you were able to sell your options, then you were in a totally different situation than what is being discussed here.
Early employee at a UK startup that started in 2001. In 2007, exercised options for a cost in low five figures. Company loaned me the money to exercise and I continued to work there. When I left in 2012, I paid off the loan with cash. Company sold in 2018 and the ROI was substantial - received a sum in the high six figures.
In the next company, I bought shares outright during one of the investment rounds for a few thousand pounds, and later, in an acquisition, I had the opportunity to sell my shares again - for £0.
Lessons learnt: be patient (I held options or shares in the first company for 17 years!) and don't bank on shares as the route to riches.
I'm still $3k in the red. The company is about to go public "any time now" (but unfortunately I've been severely diluted, I don't even expect to break even... well maybe if the Fed keeps pumping up markets)
Company I work for was a startup that got acquired. I was there for a couple of years and got in the low 10's of thousands $ worth of a bonus thanks to vested stock options.
Nowhere near life-changing, but better than a kick in the balls.
Worked as a sw dev for a small B2B startup in the midwest that was acquired by a much larger player in the space.
I was an early employee and stayed for many years, knowing that my options may be worth little or even worthless in a liquidity event.
After the acquisition last year, my pre-tax payout ended up around $80K. Not a life changing amount, but more than I was expecting. And it gave me a nice chunk to deploy toward investments.
I knew I wouldn't become rich and I'm happy with how it turned out.
Meta: what’s with all the employee stock option submissions recently? I see like four in the past two days. Is it because of the clump of major tech IPOs?
Interesting comments so far, mostly showing how the options have not paid off. Not surprising really, when you consider the likelihood of so many startups reaching a high valuation, and of those that do not having dilution to make the early options much less valuable.
I've worked in a few startups.
One got VC funding but then died in the 'recession' that followed.
Another remained small, couldn't make useful sales, so got bought by a larger company in that market. The main founder came out of it with a well-paid job at new-co. The rest got some small amount of payback for the IP some time later. That did not make up for the salary sacrifice from working there. Still nice to think the product was done well enough and made sales, but that feeling doesn't pay the bills, or the mortgage.
Next startup showed me how dilution works, and how trust is beaten up by greed. Still have some options in the company that bought the original, but those will only be enough for a few good holidays, not even a car purchase.
Despite the fact that these haven't resulted in big payouts for me, the experience was still good in many parts - creating new products and services, growing teams, and so on.
What I would say is, don't take too much of a drop in salary for those benefits, assume the share options won't amount to much, and make the most of the startup environment.
Oh, and do make sure you continue to give yourself some personal time. What I do regret is the time given to those companies that should really have been for myself and my family. The balance I applied did not work out, for me. A shame, but you cannot be too sure at the time. Optimism is a good thing. Pragmatism and realism too.
I did an 83b when stock options were granted since I was a very early employee. Paid $30 for 30,000 shares, which then went through a 10-to-1 split, so I had 300,000 shares. But, in the end, we went bankrupt and I received nothing. Wasn't out any real money and the experience alone was worth it.
Lost all my money; the company was sold at a low enough value that all the higher-priority shares went before mine. Never thought I had much of a chance, though, so it wasn't very surprising. Startup stock options are always a long shot.
One thing I'd really like to know from folks is this:
Surely the startup salary was less than what most medium to large businesses would pay. So what return did you need on options to break even compared to other jobs you could have taken? Has anyone actually reached that?
Let this thread be a lesson to all of us: stock options are monopoly money. If a company wants to screw you, they likely already have the language in the option grant agreement to do so. It is not reasonable to pretend like you can fight hungry investors and executives who want to screw over tiny employees.
I've never taken options seriously. That isn't to say that I haven't taken them, I just see them as worthless, and I am fully supportive of negotiating all other aspects of employment as if they are worthless. There are too many horror stories to see options as anything but. Congratulations, greedy leaders, you are ruining the very mechanism that keeps an employee engaged and "bought in" to the company's success!
My options? "Extinguished" in some "event" 18 years ago. My guess is that's the event where they screwed as many employees as they could.